One of the latest facilities to help limit the financial harm caused by the pandemic restrictions is the Dutch Temporary COVID-19 (Social Affairs & Employment and Justice & Security) Act (Tijdelijke Wet COVID-19 SZW en JenV, “facility”). Under this temporary legislation, businesses can block specific actions from creditors to recover their claims and obtain payment deferments in respect of those creditors. The facility came into effect on 16 December 2020.
Purpose of the facility
This facility is intended for businesses that are prevented by the COVID-19 outbreak from operating as usual and as a result are temporarily unable to fulfil their payment obligations. The purpose is to prevent creditors from seeking to nevertheless force those businesses to pay, using strategies such as filing bankruptcy petitions or levying attachment. The facility is a continuation of the practice that courts have pursued since March 2020 to be conservative in their assessments of petitions for insolvency and leave to levy attachment.
Blocking actions to recover claims
Normally, creditors have a variety of options for forcing their debtors to pay up. The three most important of those options are:
- petitioning for the debtor’s insolvency: the objective here is generally to obtain payment from the debtor to avert that insolvency;
- levying prejudgment attachment on the debtor’s assets: the objective here is to force the debtor to pay or else to secure those assets pending judgment in legal proceedings;
- selling the debtor’s assets through attachment in execution, and using the proceeds from the forced sale to pay the claims. This option is only available if the creditor has already won proceedings against the debtor or otherwise has what is commonly known as an enforceable title.
Under the new facility, businesses that are confronted with one or more of these actions may ask the court for the following relief:
- against a petition for insolvency: to defer (i.e. postpone) hearing the insolvency petition for two months. Businesses may make this request a total of three times;
- against a prejudgment attachment: to lift the attachment;
- against an attachment in execution: to suspend enforcement or to suspend the creditor’s demand for assets for a maximum duration of two months. This request may also be made a total of three times.
If a business has made one of these requests, the court must award it if three conditions are satisfied. First, the business must make a plausible case that the outbreak of the pandemic has made it impossible to continue its operations as normal, and the business is temporarily unable to pay its debts as a consequence. Under the facility, the assumption is that this will apply if the business can demonstrate that (1) it had sufficient liquid assets to pay its debts before the pandemic broke out, and (2) its revenue has dropped by 20% or more since the outbreak began. The second condition is that the business must have sufficient prospects of being capable of paying its creditors once again after the deferment or suspension has ended. Lastly, the relief may not disproportionately harm the interests of the creditors in question. As this shows, the facility is intended purely to help businesses whose operations are essentially healthy but that are struggling as a result of the pandemic.
If awarded: automatic payment deferment
If the court awards the relief requested, this automatically carries a payment deferment for the debtor. This then means that the creditor that petitioned for the debtor’s insolvency or that levied the attachment will be temporarily unable to enforce payment. Additionally, that creditor may not cancel its contract with the business on grounds of the debtor’s failure to pay, nor stop making deliveries to the business.
This payment deferment only covers existing debts, however, and new obligations will still have to be paid. This includes new monthly instalments that fall due under an existing contract, such as a lease. The payment deferment also only affects the creditor or creditors that petitioned for the debtor’s insolvency: other creditors therefore may still try to enforce payment.
This means, then, that the business cannot be obliged, but in principle is still permitted, to pay debts that already existed when the payment deferment was granted. To make it impossible for an insolvency trustee – assuming that the debtor’s insolvency subsequently cannot be averted – to demand repayment simply because a creditor was aware of the petition for the debtor’s insolvency, the facility also amends (among other provisions) the rules governing claims for fraudulent conveyance in insolvency under the Dutch Bankruptcy and Insolvency Act (Faillissementswet). However, this does not diminish the need to consider carefully which creditors should and should not be paid: with insolvency already looming, the business must in principle give due consideration to the interests of all its creditors.
The new facility has serious consequences for the creditor’s position: it is blocked from applying the options that are usually available for recovering its claims, while that might still be possible for other creditors. With this situation in mind, the facility dictates that courts handling such requests must consider the creditor’s interests, and must hear the creditor before ruling on the request. Courts may also impose measures on their own initiative to secure the creditor’s interests, although the facility does not explain what those measures are. Another important safeguard is that the business will be obliged to notify the court and the creditor immediately if another creditor levies attachment; if that happens, the creditor may ask the court to reinstate a previously lifted attachment to ensure that the creditor retains its claims on the proceeds from the attached asset.
The new facility formalises existing practice, while also providing further measures. On the one hand, it is positive that the facility provides additional breathing room for businesses that are struggling financially under the pandemic restrictions, but that expect to be capable of paying their creditors again further down the road. On the other, however, the facility also interferes with creditors’ rights to recover their claims. It will therefore be important for courts to carefully assess the cause of the debtor’s financial difficulties, and whether the business is expected to be able to repay its debts again in the foreseeable future. Then, and only then, does the facility allow for creditors to be put on hold.